Valuation

INTRODUCTION

First of all I have to say I don't usually post valuation exercises as it requires a lot of assumptions about a company's future performance and I find it hard to believe that a small private investor (like me) can actually do a good job without investing just as much time as a professional analyst. I'm talking about the traditional Discount Cash-Flow Model (DCF), but of course there are ither ways to valuate the company, e.g.: using market multiples.

This is the approach I'm going to take here, NOT because I believe it is a superior method of valuation, but because I found it interesting and useful to know that when analysing E&P companies there are very specific multiples to consider.

EBITDAX

As I mentioned, there are two accepted accounting methods for these companies (Full Cost & Successful Efforts), so the first thing we need to do is find a common ground. This is where EBITDAX comes in. EBITDAX is Earnings Before Income Tax, Depreciation, Depletion, Amortization, and Exploration Costs and is used in the same way as EBITDA for other industries so it's like a very simple and primitive cash-flow measure.

(source: "Oil and Gas Company Valuations", Business Valuation Review)

SAMPLE

Selecting a good sample of companies requires finding companies that are similar to the company you want to valuate, so it's always important to know the specific industry indicators. After controling for size, country in which it operates and drilling type (onshore vs offshore) these were the companies and the indicators I used:

Please note that regarding D/E I couldn't be very picky or I wouldn't find ebough companies to analyse.

Reserve life is the proved reserves divided by the current production per year.

BOEpd = Barrels of Oil Equivalent per day.

Oil/Gas = % of oil production in total production.

EVALUATION

Basically I used the Enterprise Value in relation to the EBITDAX, proved reserves and production per day in Barrels of Oil Equivalent. This is because reserves are the most valuable asset of E&P companies, production is the main gauge comparing companies (as prices are externally determined) and EBITDAX referers mostly to the ability of the company to generate cash-flow.

I have to admit I wasn't very rigorous computing EV as I just used market capitalization (as provided by Google Finance) added the book value of debt less cash and cash equivalents - Net Debt (as stated in the last quarterly report).

SYRG is pretty much in the middle in every multiple, but it is above average regarding EV/Proved Reserves and EV/BOEpd. Nevertheless, this exercise is not meant to include SYRG's results, instead it is supposed to help understanding what's a reasonable interval for these multiples.

Obviously, this gives a very bad ideia about te company's intrinsec value. Still, I didn't want to "work" the numbers until a have exactly... what I want. Yes, this is a very difficult exercise and it is very hard to have a find the "right" sample, but even in similar companies is not guaranteed to find a smaller dispersion of numbers and this is worthtless from the investor's perspective especially because the share price is $5.24 (22/12/2012).

With that beig said I have to point out another obstacle for a small private investor in using this analysis. For this purpose it is required that we use projected EBITDAX instead of current. The reason is that the present value of the company is a reflection of the future performance.

SUMMARY

This is a very interesting exercise as it requires a good understanding of the business, but it is also very hard and time-consuming. And most importantly: it doesn't guarantee results. This is my experience and I urge you to share your opinion on this subject.